Warren E. Buffett and Bill Gates stated clearly that too many wealthy individuals pay unusually low taxes to the federal government. I’d like to share the information gathered so far on Corporate America so that we might be able to understand our current tax code.
Recently a review showed that 280 of the biggest publicly traded American companies faced federal income tax bills equal to 18.5 percent of their profits during the last three years — just a bit over half the official corporate rate of 35 percent and lower than their competitors in many industrialized countries.
Mr. Buffett, said that the tax code is unfair, he paid just 17% in federal taxes last year, about half the percentage his secretary paid. I want to know how much his secretary earns to pay 34% in effective federal taxes – this seems a bit high but his point is still valid. Business owners are not treated the same by the tax code as employees – should they be?
This corporate review, examined the regulatory filings of these companies to compute each year’s current federal taxes. The study does understate tax payments because it omits deferred taxes that they may pay in future years. Since it did not analyze actual tax returns but used publicly available corporate regulatory filings many companies dispute it.
If 17-8% is the going Corporate average rate then we must look more closely at the 70 companies (a quarter of the 280 corporations) which owed less than 10 percent of profits in federal income taxes and the 30 companies that had no federal tax liability for the entire three-year period.
Why is this currently important?The Congressional super-committee will report on November 23rd how we’ll cut the budget deficit and is considering revamping our tax system. The goal would be to simplify corporate structure and reduce corporate taxes. Corporations claim that the current system puts American companies at a disadvantage with competitors abroad and encourages them to shift jobs and investments overseas. Is this real or a bargaining chip?
My view is that the current tax system rewards companies that aggressively avoid taxes. A quarter of the companies in the study had a federal tax bill of 35 percent of their profits, while a similar number had an effective rate of less than 10 percent. Therefore not all corporations are equally sharing in the tax burden. Maybe the solution is to close the loopholes & force a minimum tax burden on profits for all corporations instead of lowering the rate.
Among the companies that the study said escaped a liability for all three years were Boeing and Ryder System, which benefited from the additional depreciation intended to stimulate the economy. Boeing officials countered that they had paid some federal taxes, but would not say how much. They said that their lower rate was from tax breaks intended to encourage hiring. Boeing claims to have hired 9,000 workers this year as a result of their tax credits.
Other companies include General Electric and Wells Fargo who claim respectively that new job creation and the Wachovia right downs where their reasons for reduced tax liability.
The fact is that corporations are paying a smaller share of taxes than in previous decades. According to the IRS they paid a total of $191 billion in federal income taxes in 2010, which is about 1.3 percent of the nation’s gross domestic product (GDP). That is down from about 6 percent during the 1950s.
Despite this decline the Americans for Tax Reform, said that the United States system was not competitive because it taxed income earned around the world, instead of just in this country. On the other hand Citizens for Tax Justice countered that about two-thirds of the American companies with significant profits overseas actually paid more in taxes to foreign governments than they did in the United States.
But should we not consider the total tax? The bottom line for a company is not how much they pay one country but how much they pay overall.
On the other hand, I can agree with the Citizens for Tax Justice’s request that the federal government end the subsidies and shelters that favor companies that game the system.
How can the supper-committee come up with real budget saving unless the loopholes are closed?
What do you think?
Edi Alvarez, CFP®
BS, BEd, MS